Credit Cards and Personal Loans
You might not know this but not all debt is bad. There are actually two kinds of debt – good debt and bad debt. Good debt is the kind you take out for investments that you hope will grow in value, such as a house. Bad debt is the kind you take out for items that decrease in value, such as a car – goes without saying that you should avoid bad debt whenever you can!
Credit cards often get bad press, however they aren’t always the work of the devil. In fact, experts suggest that if used wisely, they can work to your advantage. How? By following the simple rule: pay off your credit card balance in full every month. By doing so you won’t be charged any interest on your purchases and the only credit card costs will be the annual fee (if applicable) and the membership fee (if your card is linked to a rewards program).
However, paying off the balance in full each month takes discipline and if you can’t control your spending think about getting rid of your credit card and using cash or a debit card instead. In a nutshell, try to always save for what you want before you make your purchase!
There are quite a few handy finance sites that compare credit card features and fees (try Rate City for starters). Just be aware that some sites are paid by financial institutions to list/link to their products.
If you have a credit card take a look at this calculator at MoneySmart – the website of the Australian Securities and Investments Commission (ASIC). It’ll show you how long it may take you to pay off your credit card if you only pay the minimum each month and how by paying more you can significantly reduce the time it takes to pay off your debt as well as save lots of money!
Personal loans, like credit cards, should be treated with caution. By taking out a personal loan to buy a car, for example, you’ll substantially increase the total cost of the car. Think about saving up for whatever it is you want first (if possible) so that you don’t need to borrow the money. If you have no choice but to take out a personal loan aim to pay it off as quickly as you can so that you pay as little interest as possible.
There are plenty of sites that compare loan features and fees (try Rate City). Again, be aware that some sites are paid by financial institutions to list/link to their products.
Credit reference agencies exist to check out and record the credit history of potential borrower. They then make this information available to their customer such as banks (who use information about your credit history when weighing up whether or not to offer you a loan) and utilities companies (before they set up an account for you).
At Checkmyfile you can calculate your credit score and order a free credit report. There are a few to choose from – for a free version click on the option for a credit report analysis by Dun & Bradstreet (an international credit reference agency).
Struggling with debt?
If you’re struggling with debt do something about it as quickly as possible. There’s plenty of help out there if you know where to look.
ASIC’s website has some good pointers about what to do when you’re trying to work your way out of debt.
A number of community organisations around Australia offer free financial counselling – the Australian Government website tells you how they can help and where you can find them. Be aware that financial counsellors are not financial advisers and will not give advice or prepare a financial plan for you but they will show you how to make informed decisions and help you to take control of your finances.
Centrelink’s Financial Information Service (FIS) is an education and information service available to everyone in the community. It’s independent, free and provides services by phone, personal interview and through seminaref Again, FIS Officers are not financial advisers – they won’t give you advice or prepare a financial plan for you but they will inform you of your options and can help you to understand your own financial affairs.
Find a financial adviser
Check out the Australian Securities and Investments Commission’s website MoneySmart – it has loads of great information about obtaining personal financial advice and finding a qualified financial adviser. Experts often suggest you find an adviser who charges by the hour instead of receiving a commission.
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